Earlier tonight I was watching the only thing that seems to matter to short term trade, the EUR/USD.
I saw this move up, which seemed quite extreme at the time. Apparently the consortium representing European banks in the 50% bondholder haircut said that 9 of 10 banks were likely to accept the terms, causing this spike. That was the knee jerk reaction to headlines, but the larger picture is this. With the banks taking 50% losses on Greek debt holdings and without the protection of CDS to insure against those losses, the banks will immediately have a problem that would likely result in them having to sell the underlying assets, namely Greek and other PIIGS bonds, once again driving yields up (unintended consequences). I went to look at a few charts for 5 minutes or so and saw a truly extreme move to the downside. This is somewhat reminiscent of 2008 when unintended or unforeseen consequences an pop up instantaneously and change everything in a blink of an eye.
Apparently the catalyst for the sudden risk off trade was a possible conclusion to the recent ongoing trouble faced by MF Global, which is a New York based Broker/Clearing House for commodities as well as market based futures and derivatives, but last year John Corzine took over control and tried to turn MF in to more of an investment bank. They bet heavily on European sovereign debt. They are now taking heavy losses on those bets and seems to be one of the first financial institutions being taken down by the European crisis. They've been in talks for various kinds of deals from mergers to buyouts all weekend long, but potential buyers, much like Lehaman's subprime portfolio, are finding it difficult to assess the value or the losses associated with the European losses. The instant turnaround in the EUR came as Dow Jones wire service announced that US Clearing Houses and Regulators should prepare for an imminent bankruptcy as this weekend has failed to secure any deals that may saveMF from that eventuality.
While MF is a significant player, not as big as CME/ICE, I don't think the panic is over MF itself as much as it is over the nature of how quickly losses in European sovereign debt can materialize, more or less echos of the 2008 Bear Stearns/Lehman era.
As I've been writing this, the Euro has fallen further, about 120 pips in the last hour alone.
As of this moment, the EUR has taken out the Thursday Oct. 27th opening of $1.4138 as it now trades at $1.4040.
ES action is a little more muted, but very lose to taking out Friday's lows.
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